The world faces a crisis of confidence. We all knew the recovery from the global financial crisis would be prolonged. However, the more serious malaise today is the lack of confidence in efforts by governments to address the structural problems that underpin weak growth, high unemployment and unsustainable fiscal balance sheets.
Global co-ordination in the recovery is inevitably harder than co-ordinated reflation at the peak of the crisis because the necessary reforms are more difficult to achieve and sustain. But the biggest barriers are political, not economic, so what is needed is political leadership and courage. More short-term fixes without serious medium-term commitments will only weaken confidence further.
A new global response is therefore needed to support a sustainable recovery. Credible fiscal consolidation in countries with large deficits must be matched by a rebalancing of global demand in order to support growth. The eurozone in particular must take decisive steps to reassure markets. Banking systems must be strengthened and financial regulation co-ordinated at a global level. Structural reforms to improve economic performance in developed economies must be accompanied by progress on global trade negotiations. Getting public finances back on to a sustainable trajectory is central. Nobody should underestimate the political difficulties inherent in the task, but it first requires a collective sense of reality. Hard decisions on spending, entitlements and taxes in countries with large budget deficits are unavoidable. Consolidation must be accompanied by targeted and fiscally sustainable policies to spur job creation, plus training and private investments to lift each economy’s potential to grow and meet its people’s aspirations.
The United States plays an especially important role in restoring confidence. Credible fiscal commitments are in its own interests and the world’s. It will also reduce the chances of a disruptive transition as we move towards a new global economy, with leading emerging economies playing an increasing role both in global consumption and savings flows.
The eurozone has taken steps to deal with the problems of contagion via an enhanced role for the European financial stability facility, and the European Central Bank’s purchases of sovereign bonds. Now it needs to demonstrate commitment to greater fiscal integration and governance arrangements that avoid moral hazard and entrench fiscal responsibility.
Greater political resolve is also needed to strengthen bank balance sheets on a sustainable basis. The longer these measures are put off, the greater the risk of deeper and wider financial damage. Progress on financial regulation should continue to be co-ordinated internationally, and the Basel III agreement should be fully implemented around the world.
Credible fiscal plans and stronger banks must be matched by more progress on global rebalancing. In any co-ordinated global effort, all countries must make their contribution. Surplus countries and leading emerging economies have to keep up the momentum of structural reforms that support domestic consumption and global demand. A slowdown in these reforms at a time of decelerating global growth risks adding to the spiral of global decline.
Further, unlike two years ago, the scope for fiscal and monetary stimulus in many of these economies is constrained by domestic inflation risks. Progress on an international framework to support rebalancing has to move from discussion to action at this autumn’s meetings of leaders and finance ministers of the Group of 20 leading economies. Greater focus must also be placed on Africa’s potential to enhance growth and demand.
Finally, faster growth will be sustainable only with structural reforms to improve competitiveness. Labour markets in the deficit countries of Europe especially must become more flexible to support job creation, and barriers to competition in product markets must be removed. The greatest global stimulus of all would be real progress on international trade talks. Politicians in all countries should show the leadership required to achieve an outcome that is in everyone’s enlightened self-interest.
We must address the challenges of the times decisively, and commit now to fundamental, medium-term reforms. We have more than our credibility at stake. We have the future prosperity of millions of fellow citizens to safeguard, too.
The writers are Jim Flaherty, Canadian finance minister; Pravin Gordhan, South African finance minister; George Osborne, UK chancellor of the exchequer; Tharman Shanmugaratnam, deputy prime minister and finance minister of Singapore; and Wayne Swan, deputy prime minister and treasurer of Australia
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